Exploring the Supply Side of Fake Goods

How companies can battle five types of counterfeiters.

Author: Thorsten Staake (ETH Zurich), Frédéric Thiesse (University of Wuerzburg), and Elgar Fleisch (ETH Zurich and University of St. Gallen)

Publisher:Journal of Business Research, vol. 65, no. 5

Date Published: May 2012

The market for counterfeit goods continues to boom: As much as US$250 billion worth of such products is sold internationally each year, the result of trademark or copyright violations. In the process, substandard imitations can significantly affect a firm’s revenue and reputation, and even cause an increase in misdirected liability claims and resulting legal fees.

Given its illicit nature, however, little is known about the supply side of the counterfeit market: namely, the characteristics and strategies employed by different types of bootleggers. This paper, which focuses on trademark violations, draws on research conducted in Europe between 2004 and 2007 and concludes that there are five categories of counterfeit producers. Understanding their varying strategies and targets, the authors write, can help companies shape their defenses.

The researchers first interviewed about 20 anti-counterfeiting experts from business and customs departments to determine which characteristics of fake articles provided the best clues about the articles’ producers. These characteristics included visual quality, functionality, complexity, and potential for financial loss or danger to consumers. Also taken into account were the specialization of the facilities and the technology required to produce an item, and the corresponding level of investment needed.

In the second phase of the study, the researchers met with 32 brand protection and manufacturing experts from 28 companies over a 20-month period. These executives analyzed more than 120 seized counterfeit items from a broad range of product categories. The authors’ analysis of the experts’ investigation led to their conclusion that five types of counterfeit producers are at work. Each has its own production capabilities, attitudes toward visual and functional quality, and risks with respect to prosecution.

Counterfeiters in the first group, which the authors call disaggregators, seek to exploit a brand name by selling average-quality products to customers who know they’re buying phony goods. Offering the “benefits associated with a product’s brand image without the original products’ functional qualities,” the authors write, requires minimal investment in production facilities.

This type of product usually sells at a fraction of the genuine article’s price; as a result, disaggregators can’t afford expensive shipment or direct-selling strategies, and rely on intermediaries in destination markets to supply street vendors. This approach reduces their profit margin, but also makes the products less vulnerable to big seizures and raids. Because the country of sale is a crucial determinant of the item’s value, enforcement activities in that market are vital.

In contrast, imitators make counterfeit items that look and work like the real thing, and in many cases fulfill the customer’s needs. Imitators primarily serve their home markets — especially young economies with weak protections for intellectual property rights — and take the ideas from foreign patents and designs to lower their development costs and get a leg up on local competitors.

Consequently, imitators are a major threat because they develop the knowledge and experience that make them the most likely to turn into above-board competitors once enforcement clamps down on their clandestine operation. They are especially vulnerable to seizures and raids because they require the highest investments in equipment to churn out their high-quality imitations.

Fraudsters, on the other hand, produce articles that look good but don’t work as well. Several experts indicated that fraudsters often attempt to infiltrate a legitimate firm’s supply chain, the authors write, and companies under threat are advised to strengthen their chain’s safeguards. Because these goods could result in a painful financial loss for the buyer or endanger the user’s health, enforcement agencies are typically eager to help companies crack down on fraudsters.

Desperados care even less about the health of consumers. They mostly produce easily mimicked expensive goods whose quality can be almost impossible to verify before purchase — such as pharmaceuticals or spare automobile parts. Desperados balance the threat of severe penalties against the opportunity for considerable profit. To reduce their risk, they mostly produce on a small scale.

“Desperados are probably the most difficult opponents to fight because they may stay profitable even if a large share of their goods is seized,” the authors write. They also use expensive shipping methods, which makes their products harder to confiscate. Companies should consider campaigns to encourage potential customers to carefully investigate products, to avoid non-certified Internet retailers and products advertised in spam e-mails, and to contact the manufacturer of the legitimate goods in case of doubt.

Smugglers, the final group, are a special case. They primarily earn their money by evading taxes at international borders — bringing in shipments of alcohol and tobacco products, for example, that might be real or fake but were never meant by the manufacturer to be sold abroad, especially at the smugglers’ typically discounted prices and often with bogus labels.

Smugglers tend to spend big on protecting their operations and have a high degree of organization from production to distribution. Although seizures aren’t likely to alter their business model, they do make it more difficult to hire replacement workers and seek out customers. “Seizures, combined with the difficulty to market the products in a strictly controlled environment, seem to be the most promising measure,” the authors write.

Because counterfeiters vary in many dimensions, companies should not treat their threats uniformly, the authors advise. “Targeted countermeasures that address the weakest spots of the illicit actors’ underlying business models may prove essential,” they conclude.

Bottom Line:
Counterfeit producers can be grouped into five categories, and responding to the strategies of each type can increase the cost-effectiveness of anti-counterfeiting measures.

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